With the chiming of the clock at midnight on January 1, 2004, new employment laws went into effect in California that expand the legal responsibilities of employers, with the potential to increase legal bills and liability. Employers have new obligations for Paid Family Leaves, new responsibilities to protect employees from sexual harassment by vendors or other third parties who come into contact with employees, and new protections for "whistleblowers." Perhaps of greatest concern to employers is the "bounty hunter" statute that allows employees to hire private attorneys to seek penalties for minor regulatory infractions when the government fails to pursue those remedies.
No problem—that's what insurance is for, you may be thinking. But insurance coverage for these disputes is not automatically provided in the standard business insurance package. Moreover, these "employment practices liability insurance" ("EPLI") policies are difficult to evaluate because no two are identical. A company evaluating an EPLI policy must compare not only the premium, but also the scope of coverage, the nature of the exclusions, and the conditions imposed. What particular provisions are critical must be evaluated based on your specific risks, resources, and goals.
Claims made:
It is important to remember that EPLI policies are offered only on a "claims made" basis. This means that the "claim" (the employee's demand or suit) must be made during the period the policy is in effect, not before or after. A related limitation is that the claim also must be reported to the insurer by a certain date. These rules can operate to leave a company high and dry if the deadlines are missed.
What is a claim?
Claims certainly arise when an employee files a formal suit, but employees also can complain of wrongful employment practices by filing a grievance with a regulatory agency such as the EEOC, via a complaining letter or e-mail, or even by an oral accusation. But these informal complaints may not be covered because of the "claims made" features of such policies.
Assume that in January of 2004 an employee tells his supervisor he has been retaliated against, but the supervisor does nothing. In February 2005, the employee files suit based on these same purported retaliatory incidents. Under the policy's terms, the claim is covered only if it is both made within the policy period and reported to the insurer within that same period. Assume your EPLI policy runs from January 1, 2004 until January 1, 2005. Since the supervisor failed to report the oral complaint, if the policy defines "claim" to include oral complaints, then the insurer probably will deny coverage because the claim was not reported until the next policy period. It is best, especially for large employers, to restrict the policy definition of a claim to a written demand, notice, or suit.
When must a claim be reported to the insurer?
Many EPLI policies specify that notice of a claim must be given "as soon as practicable" after "the insured" is aware of the claim. If the policy defines "insured" broadly to include every employee, then notice to any employee (not just a supervisor) could trigger an obligation by the company to report the claim to the insurer, even though the HR department is unaware of the claim, and a formal suit or administrative claim is not filed until much later. The better EPLI policies restrict the duty to report a claim to those claims known by the HR, legal, or risk management department, or an officer or director.
What claims are excluded?
EPLI policies generally cover allegations of wrongful termination, discrimination, retaliation (such as may become more common with the new whistleblower law), defamation, invasion of privacy and harassment. A whistleblower's claim of retaliation under new SB 777 is likely covered. But not all violations of the Labor Code are likely to be included, and thus the new "bounty hunter" provision in SB 796 may spawn uncovered claims.
For instance, a claim that employees were not paid for working mealtimes is likely to be excluded on the theory that lost wages are not the type of monetary loss insurers want to cover. Penalties are not covered under California law. However, depending on the policy, there may be a defense afforded, especially if the claim includes a panoply of alleged wrongs in addition to lost wages. For instance, XL Europe Ltd.'s standard EPLI policy will not pay lost statutory "benefits," but will pay other damages sought (such as lost overtime or other wages). Many EPLI policies will cover claims alleging retaliation for exercising rights under the various statutes. Review your policy to determine what claims are covered.
In addition, workers compensation claims are excluded from EPLI policies, although claims of retaliation as the result of asserting a workers compensation claim may be within the EPLI coverage.
What if the insurer wants to settle and you don't?
EPLI policies often include provisions that discourage the company from opposing a settlement. These "hammer clauses" shift liability to the employer or employee for a portion of any ultimate payout in excess of the demand the employer or employee refused. If possible, do not select a policy with this hammer.
Who selects defense counsel?
Especially if you are penalized for refusing an unreasonable settlement demand, you want to have total confidence in defense counsel. Insurers may require that the employer hire "panel" counsel selected by the insurer or that insurers consent to the policyholder's selection of counsel. If possible, obtain the insurer's consent to your chosen defense counsel before you purchase the policy. And if you must use insurer's panel counsel, you are entitled to complain if you are dissatisfied with their services.
Severability
How do you prevent one errant employee from eviscerating coverage for innocent or less culpable co-defendants? An EPLI policy generally provides coverage for all employees accused of committing a covered infraction. This is desirable since many employment claims are brought against the company as well as one or more co-employees, supervisors, officers and/or directors. While each may be legally liable, some may have intentionally harmed the plaintiff (such as a supervisor who engaged in quid pro quo harassment) and others may be liable simply for being negligent (such as a supervisor who negligently hires or retains a harasser). Since EPLI policies exclude coverage for intentionally harming another person, a finding of intentional misconduct should not erase coverage for the merely negligent employee.
The better EPLI policies contain language specifying that coverage for each insured is "several" (separate and distinct), and that no act committed by one insured shall be imputed to any other insured. In addition, coverage should continue until and unless a court determines that the "bad actor" acted intentionally; that way, a settlement of the claim will not eliminate coverage.
A related issue arises whenever the insurer contends that a claim was not disclosed to the insurer in the application when it should have been. EPL policies—and California law—typically permit insurers to decline to cover any claim based on an omission or representation in the application for insurance, which generally asks the employer to disclose all known claims and even "circumstances which may give rise to a claim." With a severability clause, the insurer cannot refuse to cover a claim except to the extent the individual employee failed to disclose the circumstance to the insurer.
Given the new laws that potentially increase exposure for California employers, now is thus a propitious time to examine your EPLI policy, or to consider purchasing a policy that will provide your company some comfort should claims increase.
Alison Hightower, a San Francisco-based partner with the law firm Nossaman Guthner Knox & Elliott LLP, has 20 years of experience in insurance coverage and employment-related disputes. She has litigated dozens of coverage disputes for companies, has negotiated manuscript policies with insurers, and has assisted companies in negotiating resolution of coverage disputes, including those arising from EPLI claims. She also has defended companies in wrongful termination, discrimination and harassment claims. The Nossaman law firm is an Employers Group member.